Should you buy shares in the company you work for?

I was recently notified that I ‘forfeited’ hundreds of shares in the only company I have ever invested in - but I am not surprised (or nursing any losses).

At my old job, I opted to invest in the company when it floated on the stock market and was gifted several hundred free shares.

I also opted to contribute a small monthly amount of my salary to invest.

Unfortunately, under the T&Cs I would surrender these shares if (and when) I left the business.

Despite writing about investing in the stock market for several years, this was my first foray into the world of investing.

If you're thinking of doing the same, I thought I'd share some of the pros and cons of investing your hard-earned cash in your employer.

‘Invest with virtually no risk’

Laith Khalaf, senior analyst at Hargreaves Lansdown, says staff considering buying shares in the firm they work for should find out if there are any share saving schemes.

He says schemes such as Save As You Earn (SAYE) and Buy As You Earn, also known as Share Incentive Plans, allow you to "invest with virtually no risk."

How is this possible when investing in the stock market is notorious for being risky?

SAYE allows employees to save up to £500 a month for around three to five years. Once the savings period ends, you may receive a tax-free bonus, but the bonus rate is currently 0%.

After the set time has passed, staff can choose to buy shares in the business at a pre-set price, which could be up to 20% lower than the firm’s original share price. 

"By the time you get around to buying the shares at the end of the savings term, you are usually up on the deal, although of course the share price may have fallen by enough to wipe out this benefit," says Royal London personal finance specialist Becky O’Connor.

"If the shares have fallen in value, you don’t have to buy them – you can just keep the cash savings instead."

O’Connor advises employees to make sure they are maximising their contribution to their workplace pension before they consider investing.

Up to £85,000 should be protected under the Financial Services Compensation Scheme (FSCS) as specialist firms that administer these schemes hold the funds in a dedicated account with a big bank.

Share Incentive Plans allows you to buy company shares as you go rather than at the end of a savings period and may include free and partnership shares to boost loyalty.

There is an annual limit for Share Incentive Plans at £3,600 for free shares and £1,800 – or no more than 10% of your salary – for partnership shares.

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Can I buy or sell shares whenever I want?

Unfortunately not, as employees are restricted from buying or selling shares in the company during a ‘close period,’ usually a month or two before financial results are released.

Essentially, this rule aims to stop people with inside information, including employees, from buying or selling prematurely, based on privileged knowledge.

It is highly unlikely employees can buy or sell shares during this time.

Employees will usually be offered other opportunities to trade that are likely to fall outside the close period.

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What are the tax implications?

Dealing fees are generally covered by the employer and you don’t pay Income Tax or National Insurance if you hold the shares for five years.

If you do sell the shares within five years, you will be liable for this tax and possibly Capital Gains Tax.

Thanks to the Personal Allowance, no tax is payable on interest up to £1,000 depending on your income tax band.

For Capital Gains Tax, which is paid on any assets that have increased in value, you have an annual tax-free allowance of £12,000.

So, this means you’re unlikely to pay any tax on any gains (unless you’re extremely lucky and benefit from incredible share price growth).

Even if this is the case, there are ways you can avoid this tax by transferring shares into an ISA.

What are the risks?

O’Connor is torn about the benefits of investing in the company you work for as it can be a good introduction for new investors with a potential boost in returns if the firm’s share price rises.

But she is wary of people "putting all their eggs in one basket" by owning lots of company shares.

Laith also cautions investing in your company will tie up more of your fortunes with your employer, and you may lack diversification in your investment portfolio.

As we have mentioned before, investing in a company you work for may not work out as the share price gains may not materialise.

Employees should also consider whether the company is smaller or larger, as the former can be a riskier investment, more prone to severe ups and downs.

Another potential issue is that some employees may not be eligible for dividends with these schemes, which can boost the value of any investments if these are re-invested.

While there can be downsides, if you are confident of your company’s prospects, investing through any schemes are virtually risk-free and could be a way to dip your toe into the world of investing.

Shares the pros are buying and selling this week 

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